The recent decision by the Federal Reserve to cut interest rates for the first time since the pandemic has sparked optimism among developers in downtown Chicago. With the target range now set between 4.75% and 5%, developers believe this move could pave the way for new residential projects across the city, particularly in high-demand areas like the West Loop’s Fulton Market. However, while the rate cut is a positive sign, there are still significant challenges facing the construction industry, including high construction costs and a need for more financing options.
A Boost for Downtown Development
The Chicago Tribune reported that Chicago’s downtown has been craving new residential developments, especially in areas like Fulton Market, which is known for its blend of modern amenities and proximity to transit. Thousands of potential residents are looking to move into these vibrant neighborhoods, but the high cost of construction has stymied many projects.
Developers like Regina Stilp, founding principal of Farpoint Development, have been eager to start new projects but have found it difficult due to the cost barrier. She stated that we need to have cranes in the sky and highlighted the urgency for more residential projects in Chicago. The rate cut from the Fed is seen as a crucial step in making construction loans more affordable, potentially jump-starting stalled projects.
“We have been tracking a significant slowdown in new construction starts over the past 12 to 18 months as a result of higher borrowing costs, though not necessarily due to decreased market demand, especially in the residential sector."
Senior Associate for Midwest Business Unit of Trammell Crow | Mary Boehmler
Interest Rate Cut: A Welcome Relief
The Fed’s 50-basis-point cut is intended to stimulate economic growth by making borrowing cheaper, which in turn, could benefit the construction industry. Aaron Galvin, founder of Luxury Living, a Chicago-based apartment developer, and manager, expressed optimism, saying the move “starts to move the needle in a tremendously positive direction.” By reducing the cost of borrowing, developers can now consider taking on new projects that were previously deemed too expensive.
However, experts caution that it will take time for the effects of the rate cut to translate into actual construction activity. “It will get people a little excited, and some deals will get done, though I don’t think it will trigger a tsunami,” said Richard Traub, a partner with Smith, Gambrell & Russell.
Challenges Beyond Interest Rates
Despite the positive impact of the rate cut, developers in Chicago still face several other hurdles. High property taxes, increased costs of construction materials, and labor shortages continue to pose significant challenges. Regina Stilp acknowledged these issues, noting that while the interest rate cut is a step in the right direction, there is still a long way to go in making Chicago a more attractive place for development.
The rate cut is particularly crucial for areas like the West Loop and Fulton Market, which have seen rapid growth and development in recent years. As developers look to continue this trend, the lower borrowing costs will be essential in securing the necessary financing for new projects.
Fulton Market: A Hotspot for Future Development
Fulton Market is set to be one of the most active areas for new development as interest rates decline. The area has already seen significant growth, and developers are eager to continue building in this trendy neighborhood. Projects like Vista Property’s $448 million proposal, approved by the Plan Commission last summer, could add up to 1,450 units in three towers along Morgan Street. Similarly, plans for a 43-story tower at 375 N. Morgan St. have also been approved, signaling a strong pipeline of projects that are ready to break ground.
The Impact on Construction Workers
For construction workers, the potential resurgence in new projects is a welcome development. The slowdown in new construction starts over the past 18 months has been largely due to higher borrowing costs, not decreased demand. With the rate cut, construction workers could see a return to pre-pandemic activity levels, with more jobs and projects available.
However, it’s essential to manage expectations. “It will take time for rate cuts to filter down into new deals,” said Traub. While the rate cut is a positive sign, the construction industry must still navigate other challenges, including securing enough financing and addressing material and labor costs.
A Gradual Recovery
While the Fed’s rate cut is a step in the right direction, it’s not a magic solution. Banks may still require developers to invest more equity into new projects, which could be a significant barrier for many. Before the pandemic, banks were willing to cover 70% to 75% of project costs, but now they’re only willing to cover around 60%, creating a substantial financing gap.
Quintin Primo, CEO of Chicago-based Capri Capital Partners, emphasized that while lower interest rates are beneficial, it will take time for the real estate market to fully recover. “We still have a way to go before we’ll see a robust recovery in certain sectors like office and retail,” he said.
Looking Ahead
The recent interest rate cut by the Federal Reserve could mark the beginning of a new wave of development in downtown Chicago, particularly in high-demand areas like Fulton Market. While challenges remain, the reduction in borrowing costs could help kick-start projects that have been on hold, providing a much-needed boost to the city’s construction industry. As developers and investors begin to take a closer look at potential projects, the hope is that Chicago’s skyline will soon be dotted with cranes once again, signaling a vibrant and growing city.
With around 10,000 apartments in its development pipeline, companies like Sterling Bay are ready to take advantage of the lower borrowing costs. As Ryan Walsh, principal of acquisitions at Sterling Bay, put it, “We’ve spent the last year getting ready for this moment.” If the rate cuts continue and economic conditions improve, Chicago could see a significant increase in residential construction in the coming years.
